The rising inflation, rising interest rates, energy crisis and fear of a recession lead to wild roller coaster rides on the stock market. That is of course nerve-racking for investors, but also offers opportunities, according to J.P. Morgan Private Bank.
David Agie de Selsaeten, Managing Director at the American investment bank in Amsterdam, shares five proven investment ideas.
1. Stay invested
Sharp falls in prices can give investors sleepless nights, but the market has so far recovered from each dip and climbed to new highs.
There have ben 51 days since 1980 when the S&P 500 index fell more than 4% in a single trading day. Of these, 21 took place during the credit crisis of 2008/2009 and another nine in 2020. The impossible meat ipo date is found online. Nevertheless, the stock market has always found its way back up afterwards.
As you can see in the chart below, the best trading days often come right after the most dramatic days. You miss this if you get out after a crash.
That is why Agie advises the Selsaeten – under the motto ‘who is shaved, must sit still’ – not to run to the exit in panic, but to wait for the possible recovery.
2. Don’t be blinded by short-term returns
High inflation and interest rate hikes by central banks are currently having a significant impact on investors. Last year, a portfolio of 60% US equities and 40% US bonds fell by 12.4%.
But in the longer term, the picture looks a lot better:
the return over the past 2 years is 5.8%, or 2.9% on an annual basis
over the past 3 years: 6.2% on an annual basis
over the past 5 years: 7.3% on an annual basis
over the past 10 years: 8.4% on an annual basis
3. Opt for a diversified portfolio
While the markets have bad days, weeks and even years, history shows that the likelihood of losses over longer periods of time is lower. This is especially true for diversified portfolios.
The stock markets can sometimes be quite stormy. Since 1950, so-called rolling 12-month returns on stocks have ranged from +60% to -41%. But if we look at a mix of 50% equities and 50% bonds, the results in returns are much smaller. That bandwidth becomes even smaller the longer you are invested.
It is also striking that the mix portfolio of 50% equities and 50% bonds has not achieved a negative return on an annual basis in any five-year period in the past seventy years.
4. Markets eventually recover
The S&P 500 is now about 25% off its early January high of 4,800. Yet, according to J.P. Morgan Private Bank no mission impossible to get back to that old top.
Suppose this continues for another three or four years, the S&P 500 should rise 9% or 7% annually, respectively. That is pretty close to the historical averages.
5. There are always interesting investments to be found
Finally, J.P. Morgan Private Bank insists that a dip can also provide attractive entry opportunities. According to the asset manager, government bonds form a buffer against economic headwinds. Suppose a recession occurs in the US and the yield on the 10-year Treasury falls from about 3.50% to 2.50%, then according to J.P. Morgan Private Bank US investment-grade bonds (the least risky corporate bonds) can return around 11%. If the yield on the 10-year Treasury rises, the yield is expected to be flat.
J.P. Morgan Private Bank interesting entry opportunities. Current valuations are well below long-term averages, offsetting investors for a possible 25% drop in earnings expectations.
“In turbulent times, it is important for investors not to lose sight of their most important investment principles and to consider capitalizing on market opportunities,” concludes Agie de Selsaeten.